It is great to own a small business, but it’s also a big responsibility. With customers, staff and cash flow to keep track of, it’s easy for payroll to become another time-consuming chore.Payroll may seem like more than just paying wages to many business owners. Employers are responsible for working out the tax, National Insurance, pension contributions, statutory payments and providing correct details to HMRC in a timely fashion. With even the smallest error, there can be penalties or dissatisfied staff. Fortunately this doesn’t have to be one of the biggest headaches for small business owners. However, if the right processes, reliable software and professional support are in place, payroll can function smoothly each month.This guide covers the basics of payroll in the UK, what to avoid, and tips on how to make payroll easier.
What Is Payroll?
Payroll refers to the calculations of employee pay and the collection of all legal deductions of the payroll in accordance with the appropriate calculation method before payroll can be issued.
A typical payroll process includes:
- Time keeping of employee time/ Payroll
- Calculating gross pay
- Income tax and National insurance being deducted
- Calculating pension contributions
- Processing statutory payments
- Producing payslips
- Reporting payroll information to HMRC
Timely payments for staff.
Every employer who has employees is required to pay payroll.
Payroll can be confusing.Payroll isn’t that easy.
Many small businesses start with only one or two employees. At first glance, payroll might seem simple.
But as a business expands, payroll becomes more complicated.
Challenges often include:
- Different pay rates
- Overtime
- Bonuses
- Sick pay
- Holiday pay
- Maternity/paternity pay
- Workplace pensions
- Student loan deductions
- New HMRC rules
If there is no system, payroll can take a lot of valuable hours out of each month.
A step by step guide to the inner workings of payroll
If you understand the payroll process, it is easier to handle.
- Collect Employee Information
Employers must have accurate records before paying employees such as:
- National Insurance number
- Tax code
- Starter forms
- Salary details
- Bank information
- Pension enrolment
Having accurate employee records helps reduce payroll mistakes.
- Calculate Gross Pay
Gross pay is the total amount of earnings before deductions.
This may include:
- Salary
- Hourly wages
- Overtime
- Bonuses
- Commission
- Holiday pay
Correct payroll calculations are crucial for proper compliance.
- Apply Payroll Deductions
Employers must deduct:
- PAYE Income Tax
- National Insurance
- Pension contributions
- Repayments of student loans (if applicable)
- Orders for the attachment of earnings
Typically this is automated in payroll software.
- File and pay PAYE returns to HMRC.
All employers in the UK will need to provide payroll data through Real Time Information (RTI).
This is your submission to HMRC stating:
Employee earnings
Tax deducted
National Insurance contributions
Late assignments will be subject to penalty.
- Pay Employees
After deductions, the employee is paid the net pay.
Payslips must include the following information:
- Gross pay
- Tax
- National Insurance
- Pension deductions
- Net pay
- Keep Payroll Records
Payroll records should be kept for a few years in accordance with HMRC regulations.
Year-end reporting is also easier due to good records.
Some common payroll mistakes that small businesses can make.
Even experienced business owners can make payroll mistakes.
Common examples include:
Missing Payroll Deadlines
Penalties are not needed for late work.
Incorrect Tax Codes
When an employee has the wrong tax code, he or she may be underpaying or overpaying taxes.
Pension Errors
Many employers are still being caught out by the automatic enrolment rules.
Poor Record Keeping
Payroll delays often result from missing employee information.
Manual Calculations
Spreadsheets are susceptible to human error.
Cloud payroll software can greatly minimise errors.
Cloud Payroll Can Make Life Easier
Today’s cloud-based accounting systems have revolutionized small business payroll.
Benefits include:
- Automatic tax calculations
- Secure employee records
- Faster payroll processing
- Digital payslips
- Easy HMRC submissions
- Better reporting
- Reduced paperwork
Collaboration between the business owner and the accountant is also easier with cloud accounting.
How Payroll Links with Bookkeeping
Payroll is not an account.
The effect of each payroll run is on your:
- Profit and loss
- Business expenses
- Cash flow
- Corporation Tax calculations
- Management accounts
Payroll and bookkeeping are interdependent and when they work together, financial reporting is much more accurate.
Ensuring HMRC compliance is crucial.Compliance with HMRC is important
Payroll compliance is more than just paying employees properly.
In addition, businesses are required to follow:
- PAYE regulations
- National Minimum Wage Regulations
- Workplace pension legislation
- Real Time Information (RTI)
- Where applicable, making Tax Digital requirements.Making Tax Digital requirements where applicable.
Compliance keeps companies out of trouble with penalties and investigations.
Here are some tips for paying employees:
To ease some of the burdens on payroll, here are some practical tips.
Ensure that Employee Records are kept up to date
Address changes, tax or pension update changes should be updated ASAP.
Automate Routine Tasks
Cloud payroll software eliminates repetitive tasks and increases the accuracy of your payroll processing.
Plan Payroll Dates
Make a Payroll Calendar to avoid important deadlines.
Review Payroll Reports
Monthly payroll reports can help uncover problems before they get out of hand.
Use the services of experienced payroll professionals
Businesses can benefit from professional payroll support to save time and ensure compliance.
How Professional Payroll Services Help
This inevitably leads many business owners to the conclusion that they would rather focus more of their energy on growing their business than dealing with payroll.
Typically, professional payroll support will feature:
- Payroll processing
- PAYE administration
- Pension management
- RTI submissions
- Payslip generation
- HMRC correspondence
- Year-end payroll reporting
This enables business owners to have confidence in the accuracy of their payroll processing.
City Gate Accountants for small businesses in France.City Gate Accountants in France for small businesses
As a business expands, the task of managing payroll along with bookkeeping, VAT, tax returns and financial reporting can start to feel overwhelming.City Gate Accountants offers a complete payroll management service in addition to bookkeeping, accounting, corporation tax, self-assessment tax returns, management accounts, VAT returns, cloud accounting, business tax planning and HMRC compliance support.Businesses know exactly what they’re getting when there’s no hidden charge and fixed pricing. If you are a sole trader, limited company, partnership or a start-up there are specialists who can help you ensure that staff are paid correctly and meet the requirements of HMRC. The company also provides services to businesses that are integrated with Xero, QuickBooks and other cloud accounting systems, making payroll and financial management much easier.
When it comes to money-saving, why outsourcing payroll is often beneficial
Some business owners think that outsourcing payroll will cost more.
In fact, it can save you money by:
- Preventing HMRC penalties
- Saving management time
- Reducing payroll errors
- Improving reporting accuracy
- Empowering business owners to concentrate on development.
Outsourcing payroll can turn into an investment for many SMEs.
Final Thoughts
Your payroll doesn’t have to be among your top problems as a small business owner. Using organized records, cloud technology, and professional advice, payroll processing can easily become an integral part of your business operation.Regardless of whether you have one employee or a large group of workers, payroll processing will guarantee compliance with the law, make your employees confident and ensure smooth operations in your business. In case you spend too much time working on your payroll, contact us at City Gate Accountants and let professionals deal with payroll issues while you grow your business.
FAQ
What does payroll mean for a small business?
Payroll is a process of paying your employees, as well as the deduction of tax, National Insurance, pensions, etc. At the same time, you will have to submit information about your payroll to HMRC via RTI.
Is it possible to process payroll by myself?
Yes, it is possible to do it yourself. Payroll processing by the majority of small businesses is done internally using payroll software. However, as the number of employees increases, external payroll assistance is likely to become more cost-effective.
How often should payroll be processed?
The most common practice in the UK is the monthly payroll process, but sometimes employers process it weekly or even fortnightly.
What documents should an employer keep in regard to payroll?
An employer should keep records about their employees including their payroll, payslips, reports on their earnings, taxes, pensions, and reports made to HMRC.
Is there any connection between payroll and bookkeeping?
There is. Payroll is included in your accounting system. Salaries and other expenses related to payroll impact bookkeeping, financial accounting, and taxation.
Which software would be better for payroll?
In many businesses in the UK, they employ accounting software including Xero and QuickBooks.
What is the advantage of outsourcing payroll?
There are many advantages to outsourcing payroll which include reduced paperwork, increased compliance, minimal errors, timely payment of wages and ability for business owners to concentrate on other areas of their business.